Currency dispute strains U.S.-China trade talks

Discussions starting Wednesday also involve deficit, environmental issues

updated 5:10 p.m. ET May 20, 2007

BEIJING - Shi Xianbin has watched with alarm as China's currency has risen against the U.S. dollar, driving his small textile company to slash prices to stay competitive abroad.

Shi, manager of the Shanghai Bin Bin Yuan Import & Export Co., said that if the yuan rises another 2 percent, his privately owned, 10-employee company will face "lots of losses."

"We cannot survive," he said.

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With a critical round of trade talks with Washington opening Wednesday, Chinese leaders are pointing to the potential financial troubles of firms like Shi's in resisting U.S. demands to let the yuan rise faster to trim China's ballooning trade surplus.

The U.S. trade deficit with China, which hit a record $232.5 billion last year, has become a heated political target for both Democrats and Republicans, illustrating what they say are unfair, predatory Chinese trade practices.

Issues in the talks are expected to range from environmental problems to opening aviation routes and financial services, but the currency dispute is expected to dominate. China's intransigence is worsening an already sour mood in Washington, analysts said, strengthening those who want to punish Beijing if it fails to act.

Chinese officials are failing to understand the intensity of anger in Washington and could face a backlash, said Jason Kindopp, chief Asia analyst for the consulting firm Eurasia Group.

"This could lead to a real trade war," Kindopp said. "It happened with our close ally Japan during the '70s and '80s. Why couldn't it happen with China?"

In a move clearly timed to show Chinese flexibility ahead of the meeting, Beijing announced changes Friday to its exchange rate system that could let the yuan rise faster. Authorities said they would widen the daily trading limit to 0.5 percent above or below the previous day's closing value, up from a 0.3 percent band.

Still, it wasn't clear whether the limited change was enough to satisfy American critics.

Trying to head off a row, the top Chinese envoy to the talks Wednesday and Thursday has appealed to Washington to be coolheaded.

"Attempts to politicize trade issues should be resisted," Vice Premier Wu Yi wrote in a commentary Thursday in The Wall Street Journal.

CONTINUED : Focus on other issues

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